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Capital structure adjustments: Do macroeconomic and business risks matter?

Christopher Baum (), Mustafa Caglayan () and Abdul Rashid ()
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Abdul Rashid: International Islamic University

Empirical Economics, 2017, vol. 53, issue 4, 1463-1502

Abstract: Abstract We show that risk plays an important role in estimating the adjustment of the firm’s capital structure. We find that the adjustment process is asymmetric and depends on the type of risk, its magnitude, the firm’s current leverage, and its financial status. We also show that firms with financial surpluses and above-target leverage adjust their leverage more rapidly when firm-specific risk is low and when macroeconomic risk is high. Firms with financial deficits and below-target leverage adjust their capital structure more quickly when both types of risks are low. Our investigation suggests that models without risk factors yield biased results.

Keywords: Macroeconomic risk; Business risk; Capital structure rebalancing; Speed of adjustment; Deviations from target leverage; Financial deficits/surpluses (search for similar items in EconPapers)
JEL-codes: C23 D81 E44 G32 (search for similar items in EconPapers)
Date: 2017
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